February 27, 2013 11:53 am

Mongolia suspends key Oyu Tolgoi licences

Mongolia has suspended the licences for a key portion of the Oyu Tolgoi copper-gold mine, amid a mounting dispute between Rio Tinto and the Mongolian government over costs, revenues and taxes.

Rio is meeting with the government on Wednesday and Thursday, as the two sides are under pressure to reach agreement before funding runs out for the $6.6bn mine. If an agreement is not reached either the mine will suspend operations or Rio will extend credit to the mine, according to a person with direct knowledge of the matter.

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Oyu Tolgoi is one of the largest undeveloped copper mines in the world and is controlled by Rio, with the Mongolian government holding a one-third stake. It is set to begin commercial production in June but has become mired in an increasingly acrimonious dispute with the government, as the Mongolian parliament questioned budget overruns and raised concerns over the government’s share of revenues from the project.

Mongolia’s economic growth has been fuelled by mining developments, but overseas investment dropped sharply after a new law on foreign investment was passed last year, and some investors say they are concerned by an increasingly difficult investment environment.

The latest turn of the Oyu Tolgoi quarrel was the Mongolian government’s announcement late on Tuesday that it had annulled the mining licences – held by Canada-listed Entrée Gold – for the areas immediately surrounding the Oyu Tolgoi licence.

Although the licences were not directly owned by Rio, Oyu Tolgoi had an agreement with Entrée Gold to jointly develop the rich mineral deposits that are a continuation of the Oyu Tolgoi vein.

Rio stands to suffer from the revocation of the mine licences because Rio is Entrée Gold’s biggest shareholder, with 23.6 per cent of the shares. The area covered by the licence contains 25 per cent of the inferred mineral resources of the Oyu Tolgoi vein, according to Financial Times calculations based on technical reports.

The dispute is the first big test for Sam Walsh, Rio’s new chief executive, and Jean-Sebastien Jacques, the recently appointed head of its copper division. Oyu Tolgoi is one of the miner’s most important growth projects, as Rio seeks to diversity its earnings beyond the Pilbara iron ore deposits in Western Australia, according to analysts.

In a speech to an investor conference in Florida on Tuesday, Mr Walsh repeated his concerns about “recent political signals” from Mongolia that had “called into question” certain aspects of the investment agreement between Rio and the government of Mongolia.

“This puts at risk future investment, not only by Rio Tinto, but also by others who are considering investing in Mongolia,” he told delegates.

Entrée Gold had an agreement with Oyu Tolgoi to jointly develop the Heruga and Hugo North Extension areas, with Oyu Tolgoi taking a share of up to 80 per cent in the joint venture. Those two areas have inferred resources of more than 25bn pounds of copper equivalent, according to technical reports.

In a statement released late on Wednesday, Entrée Gold said its joint venture mining licenses had been suspended but not revoked. However, the Canadian company said the Mongolian government had cancelled a decision made in 2009 when it converted into mining licenses the Shivee Tolgoi and Javhlant exploration licenses.

Mongolia wants to transfer the licences to Oyu Tolgoi, according to a government statement, thus allowing the government to enjoy greater revenue benefits from the Heruga and Hugo North Extension areas.

Rio has already pushed back a decision on whether to proceed with the second stage of the project, which will expand underground operations. This will be made in the first half of next year when a feasibility study has been completed.

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